Medical device makers to be hit with tax in 2013

Starting Jan. 1, medical device manufacturers must pay a new 2.3 percent excise tax on their gross revenues, regardless of profits, to raise $1.8 billion in federal revenue in 2013 and $20 billion through 2019, as part of the health care reform legislation.

Recently, our colleague at the Phoenix Business Journal wrote a piece explaining how the tax “is expected to kill jobs, stifle growth and lead to fewer innovations.”

According to the article, Medtronic Inc., a big medical device manufacturer based in Minneapolis, is expecting a $120 million to $150 million annual impact for its fiscal year ending in April 2013, and a $40 million to $50 million financial hit during the first four months of next year, because of the tax.

Small and medium-sized companies will be particularly hard hit, said Wanda Moebius, vice president of policy communication of AdvaMed, an industry trade group based in D.C.

“It will have a significant impact on companies that are struggling to get profitability,” Moebius said. “It’s across-the-board bad policy.”

In 2010, direct and indirect medical technology jobs in Virginia and Maryland were 11,200 and 14,100, respectively. And the sector’s contributions to the local economy in Virginia, Maryland and D.C. reached $1.6 billion, $2.4 billion and $21.4 million, respectively, according to a report by AdvaMed.

The trade group also estimated the tax will collect about $30 billion over the tax window, which it said will harm companies’ ability to expand and increase its capital on research and development.

“As companies prepare for this tax, we’re seeing a lot of things happening in the sector that are just negative to future growth and future medical progress,” Moebius added.

The lobbyist group is “cautiously optimistic” with a campaign launched three weeks ago to focus on repealing the tax, as the deadline is fast approaching.

Cary Pharmaceuticals, a pharmaceutical development company based in Great Falls, is expecting to delay the launch of a new product.

The company, with three employees, develops products for clot formation prevention in catheters and licenses patents to major medical device companies.

“It’s important to us because we support innovation and new products and new ventures,” said Doug Cary, president and CEO of the company.

According to him, a 2.3 percent of total sales can be equal to 25 percent of a company's profits, which will have a “dire effect” on the industry.

“If they’re not investing in a new product, then we don’t have a market,” he added. “Coupled with the risk reverse nature of FDA, then it’s a ripple effect — there is no new product.”